William A. Galston is a frequent contributor to The Wall Street Journal editorial pages with whom I don’t always agree, for example, in his declaration in the headline to an article this summer that “government is a good venture capitalist”. But his recent essay on federal policy uncertainty and its impact on the growth of the economy is on point. He reports on studies conducted over the past several years by economists at the University of Chicago and Stanford University that developed a measure of economic policy uncertainty and its impact on economic growth. They found that policy uncertainty since 2007 has risen to historically elevated levels, with peaks surging far above that after the 9/11 attacks, and has become a much larger share of economic uncertainty. They summarize their case as follows:
“When businesses are uncertain about taxes, healthcare costs, and regulatory initiatives, they adopt a cautious stance. Because it is costly to make a hiring or investment mistake, many businesses naturally wait for calmer times to expand. If too many businesses wait to expand, the economy never takes off.”
Pretty basic stuff for people who live in the real world of starting and growing a business entity and committing personal capital. (And no mention of the distortions and uncertainty of Federal Reserve monetary policy, which has badly misallocated resources and disrupted the pricing of money.) But they go further to explain that there are significant consequences in the economic growth penalty since 2007 for this high incidence of uncertainty, as much as 4% in industrial production and 2.3 million jobs, enough to reduce the unemployment rate by 1.5%. Big numbers.
Further corroboration is provided by a San Francisco Federal Reserve Bank report that shows that the unemployment rate has dropped much less than the rise in job openings suggest and that there are more jobless workers per job opening than in previous recoveries. Why? Because as uncertainty rises, the intensity of business recruitment wanes. Again, what else is new?
Galston goes on to say that both political parties are sure that their prescription for economic growth is the correct one and each is determined to get its way, that so far both have chosen to fight rather than compromise, and that the fight itself is taking a toll on the economy.
Well, he is probably right, but I have news: The current shutdown crisis followed by the debt ceiling crisis is minor compared to what is coming. It will pass. But the real policy war, led by the fight over Obamacare, is just really beginning and it will have monster implications for policy uncertainty going forward. Order more chinstraps.